Shifting Flows in Asia

Market focus: Asian oil supply and demand Soaring Asian demand is transforming world oil markets. While Asian oil supply cannot match demand, Asia has big plans for refinery building. Eric Fishhaut of GlobalView Software investigates Shifting flows in Asia H Global oil demand continues to outgrow expected grew over 23% in the first half of this year while production supplies and experts are nearly unanimous in agreement increased only 22%. that the lines will cross in the not-so-distant future. Global At the same time, India’s economy has grown at more than demand is expected to grow at an annual rate of 1.9% for the 8% annually for the last four years and is on track to exceed next five years, according to the most recent International that in the current year. In comparison, global growth accel- Energy Agency (IEA) report. Focusing on Asia, demand for erated for five straight years to 5.4% in 2006, the highest in at petroleum far exceeds supply. IEA reports demand in 2007 least 27 years, according to the International Monetary Fund. at 25.1 million barrels per day (bpd) while output is only 7 That’s despite oil prices doubling over that time. million bpd. China and India are commonly identified as the major fuel Expanding refining capacity demand growth areas due to their rapidly expanding econo- A major contributing factor to current petroleum price mies. China’s success has seemingly outpaced even its own trends has been identified as shortage of refining capacity. As expectations as its National Bureau of Statistics has just raised demand has grown, global refinery facilities have not nearly its measure of growth rate for 2006 from 10.7% to 11.1%. kept pace. Worldwide, refining capacity has increased by less With total output of $2.7 trillion, China is close to overtaking than 2 million bpd while consumption has risen by almost Germany as the world’s third largest economy behind the 4 million bpd in the past couple of years alone. In the US, US and Japan. On the energy side, sales of vehicles in China where consumption leads the world, no new refinery has been built in 30 years because of environmental restrictions. 3.0 According to a recent refinery- construction survey, a potential 9 million bpd of new capacity 2.5 is in the pipeline, almost double Russia that recorded last year. Refiner- 2.0 ies have been profiting from the d Nigeria ongoing global shortage in refin- 1.5 Iran ing capacity, which has sent crack Iraq spreads soaring. Million bp 1.0 Saudi Arabia Asia’s share of global fuel demand is projected to increase to 30% by 2015, particularly for 0.5 middle distillates. To match the soaring demand for fuel from 0 Asia and the rest of the world, 2004 2005 2006 Q1 2007 plans for building a spate of new refineries over the next five years F1. Comparison of crude import sources for IEA Asian members have been announced, with a Recent crude oil streams show increased imports from Iran and Iraq and a notable drop total capacity of 7 million bpd. off from Saudi Arabia. The Asian IEA member countries include Japan, Korea, Australia Half of this new capacity will be and New Zealand Source: IEA in Asia. China and India, Asia’s August 2007 special report Energy trading in Asia 59 Market focus: Asian oil supply and demand key energy consumers, have 8 set out their plans to expand China Japan 7 refining capacities. In June, Iran announced it 6 plans to help build five new 5 refineries across Asia with a total capacity of 1.1 million bpd. This 4 represents its bid to strengthen Million bpd 3 ties and boost cooperation in the region. These refineries will 2 be built in China, Singapore, 1 Indonesia, Malaysia and Syria. 0 Growth in India 1965 1975 1985 1995 2005 Interestingly, India is looking to F2. Petroleum product consumption (1965–2006) play a big role in closing the gap China’s long-term growth trend in the consumption of products stands in contrast to the in global refining. With a stated trend reversal that Japan has accomplished in the past several years Source: BP goal of turning the country into the ‘world’s refinery hub’, state- owned oil-refining companies China expansion have lined up investments of $12 billion to upgrade their China’s expectation of growing dependence on oil imports refineries. The Indian government has recently unveiled has brought it to acquire interests in exploration and plans to expand refining capacity by 62% to 4.82 million production in places like Kazakhstan, Russia, Venezuela, bpd over the next five years as it steps up efforts to become a Sudan, West Africa, Iran, Saudi Arabia and Canada. But major global fuel exporter. despite its efforts to diversify its sources, China has become India’s exports of petroleum products have already increased increasingly dependent on oil from the Middle East. Today, to $10 billion in the first six months of the present year and 58% of China’s oil imports come from the region. At this are expected to reach $20 billion during the whole year. pace, by 2015, the share of Middle East oil will reach Refining is seen as a major foreign-exchange earner for India 70%. Though historically China has had no long-standing to offset the money spent to import 70% of the country’s strategic interests in the Middle East, its relationship with energy-consumption needs. the region from where most of its oil comes is becoming Reliance Industries (RIL), India’s largest private company, increasingly important. formed a 100% subsidiary called Reliance Petroleum (RPL) to According to data released by China Customs, China set up a greenfield petroleum refinery and polypropylene plant exported 27.6% more oil products in the first half of this year at Jamnagar, Gujarat. RPL’s new refinery is to begin operation than in the same period of 2006, following the country’s initi- in December 2008 with production of 580,000 bpd. This ation of an ambitious plan to expand refinery capacity. coupled with an existing RIL facility at Jamnagar with capacity of 660,000 bpd (making it third largest in the world) will North America firmly establish the city as an energy- 23.9% outsourcing hub. The new refinery will Asia-Pacific be the sixth largest, while the combined 27.4% capacity will turn the Jamnagar complex South America into the world’s largest single-location Africa 7.7% refinery, with a capacity of 1.2 million 3.8% bpd. That output will be 20% higher than the world’s current number one, Europe Venezuela’s Paraguana. Middle East 28.9% 8.3% 1 During the collection of the data for figure 3 and figure 4, ‘Asia-Pacific’ and ‘Europe’ comprised the following countries: • Asia-Pacific: Australia, China, India, Indonesia, Japan, Singapore, South Korea, Taiwan, Thailand and other. F3. Regional refinery capacity in 2006 • Europe: Belgium, France, Germany, Greece, Italy, The Asia-Pacific1 region accounts for over a quarter of global refining capacity Netherlands, Norway, Russian Federation, Spain, Sweden, Source: BP Turkey, UK and other. 60 Energy trading in Asia special report August 2007 North America South America Europe 35 Middle East Africa Asia-Pacific 30 25 20 15 Million bpd 10 5 0 1977 1982 1987 1992 1997 2002 2006 F4. Refinery capacity trends The Asia-Pacific1 region is the clear leader in refinery capacity growth and has been on a steady trend towards this for the last two decades Source: BP The IEA has forecast that China will add 170,000 bpd of cutting the supply from Korea nearly in half. Korean fuel oil refining capacity by the end of this year through Sinopec’s premiums, including shipping costs, have been as high as $20 60,000 bpd expansion of its Yanshan facility in Beijing and a metric ton while competing cargoes from Venezuela and PetroChina’s 110,000 bpd expansion of its Dushanzi refinery Iran have been sold at about a $5 premium. in the northwestern Xinjiang Autonomous Region. It also Meanwhile, Japan has managed to curb consumption of expects China’s oil refinery capacity to expand four-fold next petroleum products in 2006, reducing this by 3.6% by shaving year (706,000 bpd), nearly half of the predicted 1.49 million off nearly 200,000 bpd. In comparison, China’s utilisation bpd that will be added globally, with a 200,000 bpd project grew by 539,000 bpd. At the same time, refinery production from Sinopec, a 240,000 bpd project from offshore oil giant had a modest increase that reverses a downward trend over the China National Offshore Oil Corporation and an additional previous five years. 260,000 bpd from the expansions of five other refineries. While popular consensus is that the supply-demand gap While other countries are investing in biofuels, the Chinese is shrinking, there are some reports that are contrarian. government has stated it will not approve new grain-based According to the recently released BP Statistical Review ethanol fuel projects due to grain supply concerns and that of World Energy 2007, oil reserves continue to grow. The companies currently engaged in corn-based ethanol projects current estimate is 1.2 trillion barrels of reserves, which is an will be ordered to gradually shift to non-grain ethanol increase of 15% in the past decade. It also states that consump- projects. The country continues to invest in coking and tion grew in 2006 by only 0.6 million bpd, only half of the hydrocracking capacity, as well as in its ability to process the prior year’s rate.

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